<News Analysis> Cathay Pacific 2H21 results better than expected, but dark clouds still lie ahead
- Cathay Pacific announced that its full-year net loss (after preferred dividends) for FY21 will be in the range of HK$6.2-6.8bn, markedly better than the street’s projection of a net loss of HK$12.0bn.
- The airline was marginally cash flow positive in 2H21, which was also better than its initial guidance and our projections.
- December-21 passenger capacity was at 11.4% of pre-crisis levels, while passenger load factors were at 36.6%.
- CX expects a cash burn rate of HK$1.0-1.5bn per month from the month of February-22 in light of heightened restrictions.
What’s new?
- CX announced it expected a net loss of HK$6.2-6.8bn in FY21, suggesting the company booked a net profit of HK$1.1-1.7bn in 2H21, a considerable improvement in its financial performance in 1H2021 (net loss of HK$7.9bn)
- Earnings surprise in 2H21 largely driven by higher-than-expected cargo yields and cargo load factors, coupled with stringent cost management.
- CX was cash flow generative in 2H21, better than its initial guidance of less than HK$1.0bn per month, and a considerable improvement from its cash burn rate of HK$0.9bn per month in 1H21.
- Tighter travel restrictions and quarantine requirements on its aircrew led to cargo and passenger capacity plummeting to 20% and 2% of pre-pandemic levels respectively in January-22.
- Accordingly, the airline now anticipates a cash burn rate of HK$1.0-1.5bn until conditions improve.
Our thoughts
- CX’s financial performance in 2H21 was certainly much better than what we had expected. Based on market indicators, cargo yields in 2H21 were notably above the peaks seen during the height of the pandemic, boosted by a recovery in global economic activity and severe global supply chain disruptions during the period.
- While cargo yields should stay fairly buoyant in 1Q22, they should decline from 2Q22 as the pandemic recedes and more passenger aircraft (with bellyhold cargo capacity) return to the sky.
- We believe that unless Hong Kong were to modify its COVID-zero stance, the highly transmissible Omicron variant will be an extended drag on CX’s operations, and the airline will have a longer path to profitability than its peers.
- For comparison purposes, international passenger capacity in Asia Pacific was at 20% of pre-pandemic levels in November-21, while CX’s closest peer, SIA was at 45% of pre-COVID19 levels in December-21, significantly higher than CX which was at 11.4% in December-21.
- While we are likely to raise our target price on CX to factor a higher equity base (lower than expected net loss in FY21F), we are still neutral to slightly negative on the stock due to its rich valuation (+1.5-2 SD above 5-year average on a P/BV basis).
- More updates after the company’s full-year results announcement.